Six situations when you should not apply for a personal loan

A personal loan is probably the easiest way to get some much needed respite if you’re short of funds and are looking for a quick funding option. With zero to minimal documentation and pre-approved loans being disbursed in literally under a minute’s time (sometimes even a few seconds), it really does seem like the go-to alternative for most people. It is also hassle-free in comparison to a secured loan, since you are not required to provide any collateral security at the time of availing the loan. If you also do a quick check against credit card loans, a personal loan is likely to offer you lower interest rates.

However, is a personal loan what you indeed require, or could you evaluate alternatives? Let us then take a look at six situations when you should not apply for a personal loan, and why.

Funding a vacation – While almost all the adverts for a personal loan will advise you to the contrary, it is best to avoid availing of a loan to go on that dream holiday. This is because you need to be judicious when you avail of a loan, and having to pay off an amount together with reasonably high bank interest rates may not be the smartest way to finance a vacation. Instead, save up the cash and remain debt-free.

Higher education – If you are looking at means by which to fund your higher education, you should know that banks offer education loans for this purpose. Not only does a personal loan wind up being more expensive owing to the higher interest rates (compared to a student loan), but a loan designed exclusively for this purpose comes with a host of features and benefits that a personal loan cannot match up to, including tax benefits and repayment options.

Financial instability – Does it look like your employment prospects are a tad shaky at the moment? If you believe even for an instant that you are likely to have some trouble repaying the loan, it definitely is not the right time to avail of one. Remember that late or skipped payments tarnish your credit score and hence if you have the additional pressure of paying off a loan you can ill afford, now may not be the right time. Bank interest rates are high on this product and can be unforgiving, if you do not make EMI payments in time.

Evaluate your need – If you’re applying for a personal loan to make a purchase that you can put off until later, then it is possibly a better idea to indeed wait than notch up some debt. Consider the alternatives – is there a step-gap solution you can use, instead of signing up for a loan? Does the amount of money you will shell out additionally owing to the bank interest rates on the personal loan outweigh the urgency of purchase? If the answer is a resounding yes, then step back, take a deep breath and wait until you have saved up the money you need before you splurge!

EMI repayment is a challenge – Be honest with yourself on this one, because if you believe that paying off the EMI will be difficult, it is best to avoid falling into a debt trap and defaulting on a personal loan as the consequences are likely to be unrelenting and severe.

‘Helping’ a friend – If someone you know is in a tight spot financially, think twice before you apply for a personal loan to bail them out. Remember that while this may help the person in the short term, you as the borrower need to look at the impact this loan will have on you and your credit health (to say nothing of your finances) in the long run. What if the person you borrow for is unable to repay you? The fact that they require financial assistance to begin with says a lot, and if you have to pay the EMI obligation for a loan you have not taken for yourself, this could be a potential disaster! Hence think twice when someone pulls the sympathy card, and use your own judgement.

The bottom line

While you may get a loan at the most competitive interest rates, at the end of the day, do keep in mind that ultimately a personal loan is a form of debt, and as with any other money you have borrowed, you would need to repay it. Further, your repayment track should also be faultless, to ensure that your credit score does not take a nosedive.